Valérie* and Julien*, both 33, got married in 2021. They are two professionals who each have a job that provides them with an income totaling $157,000 a year, in addition to participating in solid pension plans at public sector defined benefits.
Posted at 6:00 a.m.
The situation
The couple also own a house bought for $492,000 in 2020, and on which they plan to carry out renovations for a few tens of thousands of dollars over the next three years.
PHOTO DAVID BOILY, LA PRESSE ARCHIVES
Our couple has major renovation projects, including the replacement of windows.
Among other things, Valérie and Julien are budgeting $20,000 in 2022 for the renovation of the windows, $40,000 in 2023 for the repair of the exterior cladding and $30,000 in 2024 for the renovation of the bathrooms.
At the same time, Valérie and Julien are planning the birth of their first child within two years, for which they would be eligible for good parental leave benefits.
Numbers
Valerie, 33 years old
Employment income: $102,000
Financial assets :
– in a registered retirement savings plan (RRSP): $8,000
– in a tax-free savings account (TFSA): $30,000
– participation in the pension plan for federal civil servants
Julian, 33 years old
Employment income: $55,000
Financial assets :
– in a tax-free savings account (TFSA): $20,000
– participation in the Quebec public sector pension plan (RREGOP)
Joint balance sheet
Non-financial assets:
– as a principal residence: $492,000 (purchase value in 2020)
Passive:
– mortgage loan balance: $367,000 (at 2.97%, 5-year/60-month maturity in 2025)
Main disbursements to the common budget:
– related to residency: approximately $35,000/year
– related to lifestyle: approximately $30,000/year
– linked to registered savings accounts: approximately $21,000/year
Also, Julien plans to return to university studies starting in the fall of 2023 in order to obtain a bachelor’s degree in nursing in an accelerated formula over two years.
To replace his employment income during these two years, Julien anticipates being eligible for government programs of loans and bursaries for the training of professional nurses.
In this context, Valérie and Julien are looking for advice in order, first of all, to optimize their budgetary and financial planning in view of their medium-term projects: residential renovations, first child, return to university studies.
Secondly, Valérie and Julien seek advice on how to optimize their financial and tax planning in view of their longer-term objectives: full repayment of the residential mortgage, financing of the children’s post-secondary education, building up an asset in retirement savings independent of their employer.
Valérie and Julien’s concerns and situation were submitted to financial planner André Lacasse, of the firm Services financiers Lacasse in Saint-Hubert, a suburb of Montreal, affiliated with the firm Services en placements Peak.
Advice
From the outset, André Lacasse notes that Valérie and Julien are in a “very good situation” of stable employment income with participation in solid public sector defined benefit pension plans.
“At their age [33 ans], these are significant advantages for planning their long-term financial security, during foreseeable retirement in about 30 years’ time,” said Mr. Lacasse during an advisory analysis interview with The Press.
PHOTO ANDRÉ PICHETTE, LA PRESSE ARCHIVES
André Lacasse, from Services financiers Lacasse
“Also, it allows them to refocus their good savings capacity towards their family projects in the short and medium term, while optimizing financial and tax returns over the years. »
In this context, Mr. Lacasse’s first advice to Valérie and Julien is to prioritize maximum contributions to their tax-free savings accounts (TFSA), while abandoning additional contributions to their registered retirement savings plan. (RRSP) independent of their job.
“Because they are already assured of good retirement income by combining federal and Quebec pensions [RRQ] and their public sector pension plans, the constitution of a significant asset in personal RRSPs would not really be useful to them, indicates André Lacasse.
“It could even be a tax inconvenience when they retire, when they will have to make withdrawals [de REER ou de FEER] which would then be added to their taxable income, at the risk of causing them to lose certain tax advantages for seniors. »
Moreover, by maximizing their contributions to their TFSAs, Valérie and Julien will be able to build up a capital reserve to finance their projects for the next few years, while acquiring a financial asset whose future use upon retirement will have no effect on the tax plan.
“Unlike an RRSP, cash withdrawals from a TFSA are not taxable income,” recalls André Lacasse.
In the meantime, he explains, unused contributions (maximum allowance of $6,000 per year) to the TFSA can be accumulated over the years, and withdrawals made according to short-term budgetary needs can be replenished in subsequent years, up to the cumulative amount of annual dues.
In the case of Valérie and Julien, and their projects with budgetary implications over the next five years (residential renovations, return to school for Julien, first child), André Lacasse advises them to prioritize the use of their savings capacity ( approximately $21,000 per year) in order to avoid resorting to additional indebtedness on their mortgage loan.
“For this year, in 2022, Valérie and Julien could suspend any contribution to their registered savings accounts [CELI et REER] so that they can fully pay for the renovation of the windows of their house [estimée à 20 000 $] suggests Mr. Lacasse.
For the following two years, in 2023 and 2024, during which Valérie and Julien are budgeting $40,000 for the renovation of the exterior covering of their house and $30,000 for their bathrooms, André Lacasse suggests that they first use their savings capacity to pay the first portion of the projected costs, and then draw on their TFSAs for the remaining portion.
“Not only will these withdrawals from their TFSAs serve as additional non-taxable income, but they can also be bailed out at their full tax-exempt value in subsequent years,” recalls André Lacasse.
“In addition, the TFSA contribution allowances that will be unused by Valérie and Julien during these years of significant spending on home renovations will continue to accumulate for future catch-up contributions, when they have cash available. »
By doing so, Valérie and Julien will be able to finance their home renovation and return to school projects while avoiding additional interest costs on top of their mortgage loan.
And if they respect their budget projections for the next few years, says André Lacasse, “Valérie and Julien will have been able to make these investments in the value of their home and the improvement of their professional situation without compromising their long-term financial security planning” .
* Although the case highlighted in this section is real, the first names used are fictitious.
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